| NEW YORK, Sept 27
NEW YORK, Sept 27 The U.S. Commodity Futures
Trading Commission has warned against the use of controversial
documents that have been at the center of disputes in the $300
trillion derivatives market in recent weeks, after some fund
managers accused big banks of trying to use the proposed
agreements to maintain their market control.
The derivatives market is nearing a deadline next week that
will kick-start a trading regime in which the majority of the
market is expected to gradually shift to new electronic trading
platforms which are meant to help promote price transparency and
draw in new market entrants.
The CFTC, the main U.S. derivatives regulator, has been
rushing through approvals for companies planning to offer
trading platforms, called swap execution facilities (SEFs), that
will go live Wednesday, as part of an overhaul of Wall Street
after the financial crisis.
But the process has been marred by disputes over some terms
Some of the trading platforms have asked investors to sign
documents that specify what happens to trades in the event they
are not accepted into clearinghouses, known as "breakage
agreements," said four people familiar with the situation. Other
platforms have been pressured by banks to require the documents,
but have refused, the people said.
Fund managers balked at signing the agreements, saying they
were unnecessary and were meant to benefit the largest banks
that already dominate trading. The fund managers said they would
struggle to finalize paperwork with trading partners beyond the
largest banks that already offer the most liquidity.
"If there (are) 1,000 participants that come into this
market, you need 1,000 participants to have arrangements with
1,000 participants, which would mean a million agreements,"
which would benefit the incumbent banks, CFTC Chairman Gary
Gensler told reporters at a conference in Washington on Friday.
Some banks have also tried to require that the documents be
enforced on order-book platforms, where trades are meant to be
anonymous, said one person familiar with the requests.
The CFTC, in a letter sent on Thursday to trading platforms,
clearing organizations, and banks that act as clearing agents
for the trades, said that the use of the documents would go
against rules that require SEFs to allow investors impartial
access to trading.
A rejection of a trade by a clearinghouse is also rare
because banks and trading platforms use credit checks before
trades to ensure that they will be accepted to clearing, and
because trades are accepted by clearinghouses within seconds,
the CFTC said in the letter.
Clearinghouses stand between trading partners and guarantee
trades. By removing the credit risks associated with trade
counterparties, central clearing is the first step to opening
the market to new competition. Open trading platforms that hook
into clearing will now enable any investor to trade with any
other, and to bypass the banks as intermediaries.
The dispute was the latest in a series of arguments between
market participants as the CFTC implements rules mandated by the
2010 Dodd-Frank legislation to reduce the risks of the markets.
Though rare, it's not the first time that the CFTC has
intervened on a documentation issue.
The regulator last year banned the use of triparty
documentation for clearing that was being pushed by banks
through the International Swaps and Derivatives Association and
futures trade group the Futures Industry Association, after
critics alleged that the documents would have a coercive effect
of restricting investors to trading only with the largest banks.